The Doji signal denotes indecision. Its significance lies predominantly in the oversold and overbought conditions of the stock. At the top of an uptrend, when prices are in overbought conditions, it cautions the trader to start locking in profits. At the bottom of a downtrend, when prices are in oversold conditions, it foretells the trader that bears are getting tired.
In order for the Doji signal to be valid, the following conditions must exist:
1. The open and the close of the stock must be almost at the same price level.
2. There can be an upper shadow or a lower shadow or both.
The following Figure shows a Doji candle. The open and the close are the same or very near each other. What it implies is that prices had a wide range for the day, but ended up moving nowhere. The bulls and the bears had locked in in a fight. The supply of stock at that particular price was absorbed by the demand for it. The longer the upper and lower shadow, the more indecision it implies and the more forceful the trend once a decision is made. The Japanese say that a Doji in an overbought condition must be immediately acted upon. But a Doji in an oversold condition needs to see bullish candle the following day to conclude that the trend has actually reversed. There are a few other variations of the Doji signal which can be found here.
Variations of Doji signal
As you learnt from the Doji signal above, this formation basically implies indecision on the part of bulls and bears. There is a state of equilibrium. Supply is absorbed by demand. The Japanese say that when the market/stock is tired as it forms a Doji.
Here are a few variations of the Doji signal:
Since the Doji Candle pattern is indecision, Pro KiT Signals strong to decide the market trend.